As many COVID-19 relief measures have expired, are working toward expiration, or have been repealed, an older, permanent tax credit could provide a substantial opportunity for many companies. The Research and Development (R&D) tax credit has been around since 1981 and was made a permanent fixture in the tax code under the Protecting Americans Against Tax Hikes (PATH) Act of 2015. This credit can provide hundreds of thousands of dollars in reliable tax relief to many companies developing new or improved business components including, but not limited to, software, inventions, products or formulas that improve functionality, reliability, quality or performance.
To better understand what the above potentially means for your clients, the MICPA spoke to Apex Advisors’ Dave P. Porada, Esq., vice president of Business Development and Annika Vanghagen, JD, LL.M., head of Tax Controversy.
“The R&D Credit rewards companies who hire creative talent in the U.S.,” Porada explains. The term creative talent encompasses a broad pool of talent, from engineers and architects to software developers and designers. These types of professionals are expensive in the U.S., Porada notes. “So, in order to keep the jobs here, which is in the government’s interest to keep its citizenry employed – to an extent, the R&D tax credit exists.”
Like the expiring Employee Retention Credit, the benefits of claiming the R&D tax credit can result in hundreds of thousands of dollars and can be claimed annually. Unfortunately, companies and their advisors hesitate to pursue the credit for several reasons. First, there is a lack of understanding of the R&D tax credit’s Four-Part Test and how it applies to their business. Second, there is a lack of understanding the process by which these tax credits are vetted and approved.
Determining whether the Four-Part Test is met, according to Porada, first comes down to whether or not someone is making something, from design packages to software, and whether the expenses associated with that creation meet a certain threshold. Depending on the industry, this examination can be fairly straightforward. However, it is the process of calculating the credit and examining expenses and activity that can be time consuming and difficult to navigate for an unseasoned professional.
Vanghagen explains, “In general, the credit itself is one of the most technical and complex portions of the code. It requires detailed, niche expertise related to taxation as well as the type of business a taxpayer is involved in.” Which, according to Vanghagen, is why third-party advisors such as Apex Advisors become a source of assistance for CPAs and firms working with clients eligible for the credit. “Apex has developed methodologies over many years to minimize the time intensity of what goes into calculating the credit.” She adds, “You have to drill down to such a level to identify and substantiate the actual qualifying expenses, and a lot of CPAs simply do not have the time to invest in one claim.” Clients too, according to Vanghagen, can often be hesitant about paying for that time, especially if they’ve never attempted to claim the R&D credit in the past.
Those that do pass the Four-Part Test and complete the process have a lot to gain by doing so, despite the complicated nature of the credit. “The credit is a dollar for dollar offset of your income tax obligation,” Porada says. “Say you owe $100,000 in taxes…this R&D tax credit does often range into several hundred thousand dollars for a taxpayer. So, if they look at multiple years and a company is in its first year of profit, that company can actually go back and collect its carry forwards from the years of the amendment window.” For many taxpayers, this can mean a significant tax savings.
To find out more about how the R&D credit can significantly reduce the tax liability of your clients, and recent major developments, join Apex Advisors at the MICPA Learning Showcase on Dec. 9 for their session, Ready to Talk R&D. Register today!